Cheap at the Peak Buffett Valuation

Introduction: Market Cap to GDP Appears Pricey as Fast Growing Stocks are All the Rage
The Numbers Required to Resolve Market Cap to GDP are Anything but Pretty
How the Recent Rout Stacks Up vs. History
Is the Price of Perfection an IPO Storm on the Horizon?
Conclusion: When Markets Fall, Loss Makers Can be Lethal

Introduction: Market Cap to GDP Appears Pricey

In Kailash Capital’s last piece, Private vs. Public Markets we led out with a chart showing that despite a booming stock market over the last decade the funding gap for many pensions had not improved since the trough of the Great Financial Crisis. We cited McKinsey’s research which noted that a cause of this was that many pensions “…recognized significant losses at the time of the downturn [in equities during the crash] and did not reallocate with sufficient alacrity to take full advantage of the past decade’s bull-run.”

Warren Buffet discussed this phenomenon in a 2001 interview with Fortune Magazine in which he explained his very public view that markets were expensive in 1999. He noted “When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up, we weep. For most people, it’s the same way with everything in life they will be buying – except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”¹

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Buffett went on to state that he never has “…the faintest idea what the stock market is going to do in the next six months, or the next year or the next two. But I think it is very easy to see what is likely to happen over the long term.”² How did Buffett come to feel it was “very easy to see” what is likely to happen over the long run? Fortunately, he explained that he uses a simple method he felt very “fundamental” in nature of calculating “…the market value of all publicly traded securities as a percentage of the country’s business….” which he felt was “…probably the best single measure of where valuations stand at any given moment.” In this 2001 interview he followed that comment up with “…nearly two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal.” [Emphasis ours]

We have replicated the Buffett metric in Fig. 1. We would note that current valuations today are virtually identical to the period Buffett was commenting on during his 2001 interview with market Cap to GDP trading at 152%. One place the emerging mania is leaving behind is a collection of wonderful GARP stocks.

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ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

Disclaimer

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